On 5/5/06, a leveraged buyout occurred for Oldco, whereby it became a subsidiary of Newco. Information concerning the leveraged buyout follows:
a. Management, which owned 10% of Oldco before the leveraged buyout (at a collective individual cost of $17,000) exchanged all its shares in exchange for 1,000 shares of Newco common stock (giving management a 50% ownership interest in Newco).
b. An investment firm contributed $100,000 cash in exchange for 1,000 shares of Newco common stock.
c. Newco borrowed $400,000 from a financial institution.
d. Newco paid $500,000 cash to the nonmanagement shareholders of Oldco for the shareholders' entire 90% interest in Oldco.
e. Oldco's fixed assets are undervalued by $300,000.
f. Oldco's stockholders' equity just before the leveraged buyout was $150,000.
Required:
a. Calculate Newco's total cost of its investment in Oldco.
b. Calculate the change in basis for the fixed assets.
c. Calculate the goodwill paid for.

Question

On 5/5/06, a leveraged buyout occurred for Oldco, whereby it became a subsidiary of Newco. Information concerning the leveraged buyout follows:
a. Management, which owned 10% of Oldco before the leveraged buyout (at a collective individual cost of $17,000) exchanged all its shares in exchange for 1,000 shares of Newco common stock (giving management a 50% ownership interest in Newco).
 b. An investment firm contributed $100,000 cash in exchange for 1,000 shares of Newco common stock.
 c. Newco borrowed $400,000 from a financial institution.
 d. Newco paid $500,000 cash to the nonmanagement shareholders of Oldco for the shareholders' entire 90% interest in Oldco.
 e. Oldco's fixed assets are undervalued by $300,000.
 f. Oldco's stockholders' equity just before the leveraged buyout was $150,000.
 Required:
 a. Calculate Newco's total cost of its investment in Oldco.
 b. Calculate the change in basis for the fixed assets.
 c. Calculate the goodwill paid for.

Quizplus · Accepted Answer

The Answer of On 5/5/06, a leveraged buyout occurred for Oldco, whereby it became a subsidiary of Newco. Information concerning the leveraged buyout follows:
a. Management, which owned 10% of Oldco before the leveraged buyout (at a collective individual cost of $17,000) exchanged all its shares in exchange for 1,000 shares of Newco common stock (giving management a 50% ownership interest in Newco).
 b. An investment firm contributed $100,000 cash in exchange for 1,000 shares of Newco common stock.
 c. Newco borrowed $400,000 from a financial institution.
 d. Newco paid $500,000 cash to the nonmanagement shareholders of Oldco for the shareholders' entire 90% interest in Oldco.
 e. Oldco's fixed assets are undervalued by $300,000.
 f. Oldco's stockholders' equity just before the leveraged buyout was $150,000.
 Required:
 a. Calculate Newco's total cost of its investment in Oldco.
 b. Calculate the change in basis for the fixed assets.
 c. Calculate the goodwill paid for.

On 5/5/06, a Leveraged Buyout Occurred for Oldco, Whereby It